Part IV Growth Strategies for Entrepreneurial Ventures CHAPTER 15 Harvesting the Entrepreneurial Venture © 2009 South-Western, a part of Cengage Learning All rights reserved PowerPoint PowerPoint Presentation Presentation by by Charlie Charlie Cook Cook The The University University of of West West Alabama Alabama Chapter Objectives To present the concept of “harvest” as a plan for the future To examine the key factors in the management succession of a venture To identify and describe some of the most important sources of succession To discuss the potential impact of recent legislation on family business succession To relate the ways to develop a succession strategy © 2009 South-Western, a part of Cengage Learning All rights reserved 15–2 Chapter Objectives (cont’d) To examine the specifics of an IPO as a potential harvest strategy To present “selling out” as a final alternative in the harvest strategy © 2009 South-Western, a part of Cengage Learning All rights reserved 15–3 Harvesting the Venture: A Focus on the Future • Harvest Plan Defines how and when the owners and investors will realize an actual cash return on their investment • Reasons for Harvesting To maintain managerial control and succession for successful continued operations To initiate a “liquidity event” that will generate a significant amount of cash for the investors An IPO (initial public offering) has become a reality Most realistic opportunity is sale of the business © 2009 South-Western, a part of Cengage Learning All rights reserved 15–4 Advantages and Disadvantages of Family Controlled Firms • Advantages Long-term orientation Greater independence of action Family culture as a source of pride Greater resilience in hard times Less bureaucratic and impersonal Financial benefits Knowing the business © 2009 South-Western, a part of Cengage Learning All rights reserved • Disadvantages Less access to capital markets may curtail growth Confusing organization Nepotism Spoiled-kid syndrome Paternalistic/autocratic rule Financial strain Succession dramas 15–5 The Management Succession Strategy • Management Succession Is the transition of managerial decision making Is one of the greatest challenges confronting owners and entrepreneurs in privately held businesses • Research on private firms shows: Many go out of existence after 10 years; only out of 10 survive into a second generation Only 16% make it to a third generation Their average life expectancy is 24 years, which is also the average tenure for founders of a business © 2009 South-Western, a part of Cengage Learning All rights reserved 15–6 Table Barriers to Succession Planning in Privately Held Businesses 15.1 Founder/Owner Family Death anxiety Death as taboo • Company as a symbol • Discussion is a hostile act • Loss of identity • Fear of loss/abandonment Concern about legacy Fear of sibling rivalry • Dilemma of choice Change of spouse’s position • Fiction of equality Generational envy • Loss of power Source: Manfred F R Kets de Vries, “The Dynamics of Family-Controlled Firms: © 2009 South-Western, a part of The Good News and the Bad News,” Organizational Dynamics (winter 1993): 68 Cengage Learning All rights reserved 15–7 Figure 15.1 Inside the Business Outside the Business Pressures and Interests in a Family Business Inside the Family Outside the Family Family Managers Employees Hanging onto or getting hold of company control Selection of family members as managers Continuity of family investment and involvement Building a dynasty Rivalry Rewards for loyalty Sharing of equity, growth, and success Professionalism Bridging family transitions Stake in the company The Family Nonfamily Elements Income and inheritance Family conflicts and alliances Degree of involvement in the business Competition Market, product, supply, and technology influence Tax laws Regulatory agencies © 2009 South-Western, a part of Cengage Learning All rights reserved Source: Adapted and reprinted by permission of the Harvard Business Review An Exhibit from “Transferring Power in the Family Business,” by Louis B Barnes and Simon A Hershon (July/August 1976): 106 Copyright © 1976 by the President and Fellows of Harvard College; all rights reserved 15–8 Figure 15.2 Sustainable Family Business Model Source: KathrynSouth-Western, Stafford, Karen A Duncan, Sharon Dane, Mary © 2009 a part of Winter, “A Research Model of Sustainable Family Business,” Family Business Review (September 1999): 197–208 Cengage Learning All rights reserved 15–9 Key Factors in Succession • Forcing Events Happenings that cause the replacement of the ownermanager: • Death • Illness • Mental or psychological breakdown • Abrupt departure • Pressures and Interests inside the Firm Family members Nonfamily employees • Pressures and Interests outside the Firm Family members Nonfamily elements • Legal problems • Severe business decline • Financial difficulties © 2009 South-Western, a part of Cengage Learning All rights reserved 15–10 Sources of Succession • Major Questions: Inside or outside successor? Which entry strategy will be implemented? How will power be transferred? Can the successor to gain credibility with the firm’s employees? • Types of Successors Entrepreneurial successor Managerial successor Interim specialist © 2009 South-Western, a part of Cengage Learning All rights reserved 15–11 Table Comparison of Entry Strategies for Succession in Family Business 15.2 Advantages Disadvantages Early Entry Strategy Intimate familiarity with the nature of the business and employees is acquired Skills specifically required by the business are developed Exposure to others in the business facilitates acceptance and the achievement of credibility Strong relationships with constituents are readily established Conflict results when the owner has difficulty with teaching or relinquishing control to the successor Normal mistakes tend to be viewed as incompetence in the successor Knowledge of the environment is limited, and risks of inbreeding are incurred Delayed Entry Strategy The successor’s skills are judged with greater objectivity The development of self-confidence and growth independent of familial influence are achieved Outside success establishes credibility and serves as a basis for accepting the successor as a competent executive Perspective of the business environment is broadened Specific expertise and understanding of the organization’s key success factors and culture may be lacking Set patterns of outside activity may conflict with those prevailing in the family firm Resentment may result when successors are advanced ahead of long-term employees © 2009 South-Western, a part of Cengage Learning All rights reserved Source: Jeffrey A Barach, Joseph Ganitsky, James A Carson, and Benjamin A Doochin, “Entry of the Next Generation: Strategic Challenge for Family Firms,” Journal of Small Business Management (April 1988): 53 15–12 Legal Restrictions • Privately-held Businesses, Nepotism and Succession Practices: Succession case: Oakland Scavenger Company • “Nepotistic concerns cannot supersede the nation’s paramount goal of equal economic opportunity for all.” • Almost any small business can be sued by an employee of a different ethnic origin than the owner, based upon not being accorded the same treatment of a son or daughter © 2009 South-Western, a part of Cengage Learning All rights reserved 15–13 Developing a Succession Strategy Time Time Environmental Environmental Factors Factors Understanding the Contextual Aspects Entrepreneur’s Entrepreneur’s Vision Vision © 2009 South-Western, a part of Cengage Learning All rights reserved Type TypeofofVenture Venture Capabilities Capabilitiesofof Managers Managers 15–14 Developing a Succession Strategy (cont’d) • Carrying Out the Succession Plan Identify a successor Groom an heir Agree on a plan Consider outside help © 2009 South-Western, a part of Cengage Learning All rights reserved 15–15 Identifying Successor Qualities • Sufficient knowledge of the business • Fundamental honesty and capability • Good health; energy, alertness, and perception • Enthusiasm about the enterprise • Personality compatible with the business • High degree of perseverance • Stability and maturity © 2009 South-Western, a part of Cengage Learning All rights reserved • Reasonable amount of aggressiveness • Thoroughness and a proper respect for detail • Problem-solving ability • Resourcefulness • Ability to plan and organize • Talent to develop people • Personality of a starter and a finisher; and appropriate agreement with the owner’s philosophy about the business 15–16 Creating a Written Succession Strategy • Types of Succession Strategies The owner controls the management continuity strategy entirely The owner consults with selected family members The owner works with professional advisors The owner works with family involvement The owner formulates buy/sell agreements at the very outset of the company, or soon thereafter, and whenever a major change occurs The owner considers employee stock ownership plans (ESOPs) The owner sells or liquidates the business when losing enthusiasm for it but is still physically able to go on The owner sells or liquidates after discovering a terminal illness but still has time for the orderly transfer of management or ownership © 2009 South-Western, a part of Cengage Learning All rights reserved 15–17 The Exit Strategy: Liquidity Events • Entrepreneurs consider selling their venture for numerous reasons: Boredom and burnout Lack of operating and growth capital No heirs to leave the business to Desire for liquidity Aging and health problems Desire to pursue other interests © 2009 South-Western, a part of Cengage Learning All rights reserved 15–18 Table 15.3 The IPO Process • Present proposal to the board • Restate financial statements and refocus the company • Find an underwriter and execute a “letter of intent.” • Draft prospectus • Respond to due diligence • Select a financial printer • Assemble the syndicate • Perform the road show • Prepare, revise, and print the prospectus • Price the offering • Determine the offering size Source: Adapted from Going Public (New York: The NASDAQ © 2009 South-Western, a part ofStock Market, Inc., 2005), 5–9 http://www.nasdaq.com/about/GP2005_cover_toc.pdf Accessed: April, 2008 Cengage Learning All rights reserved 15–19 Table 15.4 • • • • • • • • • • • • • • • • • • • The Registration Process Preliminary meeting to discuss issue Form selection Initial meeting of working group Second meeting of working group Meeting of board of directors Meeting of company counsel with underwriters Meeting of working group Prefiling conference with SEC staff Additional meetings of working group Meeting with board of directors Meeting of working group Filing registration statement with SEC Distribution of “red herring” prospectus Receipt of letter of comments Meeting of working group Due diligence meeting Pricing amendment Notice of acceptance Statement becomes effective © 2009 South-Western, a part of Cengage Learning All rights reserved Source: From An Introduction to the SEC, 5th ed by K Fred Skousen Copyright © 1991 Reprinted by permission of South-Western, a division of Cengage Learning 15–20 The Initial Public Offering (IPO): Prospectus • History and nature of the company • Capital structure • Description of any material contracts • Description of securities being registered • Salaries and security holdings of major officers and directors and the price they paid for holdings © 2009 South-Western, a part of Cengage Learning All rights reserved • Underwriting arrangements • Estimate and use of net proceeds • Audited financial statements • Information about the competition with an estimation of the chances of the company’s survival 15–21 Annual Reports: Disclosure Requirements • Audited financial statements: balance sheets for the past years and income and funds statements for the past years • Five years of selected financial data • Management’s discussion and analysis of financial conditions and results of operations • A brief description of the business © 2009 South-Western, a part of Cengage Learning All rights reserved • Line-of-business disclosures for the past three fiscal years • Directors and executive officers • The market in which the firm’s securities are traded • Range of market prices and dividends for each quarter of the two most recent fiscal years • An offer to provide a free copy of the 10-K report 15–22 SEC-Required Forms • Form S-1 Information contained in the prospectus and other additional financial data • Form 10-Q Quarterly financial statements and a summary of all important events that took place during the three-month period • Form 8-K A report of unscheduled material events or corporate changes filed with the SEC within 15 days after the end of a month in which a significant material event transpired • Proxy statements Information given in connection with a proxy solicitation © 2009 South-Western, a part of Cengage Learning All rights reserved 15–23 Complete Sale of the Venture • Steps for Selling a Business Step 1: Prepare a financial analysis Step 2: Segregate assets Step 3: Value the business Step 4: Identify the appropriate timing Step 5: Publicize the offer to sell Step 6: Finalize the prospective buyers Step 7: Remain involved through the closing Step 8: Communicate after the sale © 2009 South-Western, a part of Cengage Learning All rights reserved 15–24 Key Terms and Concepts • buy/sell agreements • delayed entry strategy • early entry strategy • employee stock ownership plans (ESOPs) • entrepreneurial successor • exit strategy • forcing events • harvest strategy © 2009 South-Western, a part of Cengage Learning All rights reserved • initial public offering (IPO) • liquidity event • management succession • managerial successor • nepotism • Oakland Scavenger Company 15–25 ... Family Business,” by Louis B Barnes and Simon A Hershon (July/August 1976): 106 Copyright © 1976 by the President and Fellows of Harvard College; all rights reserved 15 8 Figure 15. 2 Sustainable... Barach, Joseph Ganitsky, James A Carson, and Benjamin A Doochin, “Entry of the Next Generation: Strategic Challenge for Family Firms,” Journal of Small Business Management (April 1988): 53 15 12... three-month period • Form 8-K A report of unscheduled material events or corporate changes filed with the SEC within 15 days after the end of a month in which a significant material event transpired